Question

Comparative balance sheets for 2018 and 2017, a statement of income for 2018, and additional information from the accounting records of Red, Inc., are provided below.

RED, INC. Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	24			$	110
Accounts receivable		178				132
Prepaid insurance		7				3
Inventory		285				175
Buildings and equipment		400				350
Less: Accumulated depreciation		(119	)			(240	)
	$	775			$	530
Liabilities
Accounts payable	$	87			$	100
Accrued expenses payable		6				11
Notes payable		50				0
Bonds payable		160				0
Shareholders’ Equity
Common stock		400				400
Retained earnings		72				19
	$	775			$	530

RED, INC. Statement of Income For Year Ended December 31, 2018
($ in millions)
Revenues
Sales revenue				$	2,000
Expenses
Cost of goods sold	$	1,400
Depreciation expense		50
Operating expenses		447			1,897
Net income				$	103

Additional information from the accounting records:

1. During 2018, $230 million of equipment was purchased to replace $180 million of equipment (95% depreciated) sold at book value.
2. In order to maintain the usual policy of paying cash dividends of $50 million, it was necessary for Red to borrow $50 million from its bank.

Required:
Prepare the statement of cash flows of Red, Inc. using the indirect method to report operating activities. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

RED INC
Partial Statement of Cash Flows
For the Year Ended November 30, 2018
Cash flows from operating activities
Net Income		$   103
Adjustments to reconcile net income to :
Depreciation expense	$      50
Increase in accounts receivable	$   (46)		132-178
Increase in inventory	$ (110)		175-285
Increase in prepaid insurance	$      (4)		3-7
Decrease in accounts payable	$   (13)		87-100
Decrease in accrued expenses payable	$      (5)		6-11
		$ (128)
Net cash used by operating activities		$   (25)
Cash flows from investing activities
Cash paid to purchase Equipment	$ (230)
Cash received from sale of equipment	$        9		119-240+180-50
Net cash used by investing activities		$ (221)
Cash flows from financing activities
Cash paid as dividend	$   (50)		72-19-103
Cash received from issuance of bonds	$   160
Cash received from issuance notes	$      50
Net cash provided by financing activities		$   160
Net Decrease in cash and cash equivalents		$   (86)
Cash and cash equivalents at beginning of period		$   110
Cash and cash equivalents at end of period		$      24